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Breakfast for the mind An ounce of prevention: Succession planning for the business owner
19 March 2015 1
Today’s speakers
19 March 2015
Heather Barnhouse Partner
Keith Hennel Associate
Doris Bonora Partner
Sarat Maharaj Partner
3
Carman McNary Managing Partner
If you have a stroke tomorrow, does someone:
• Have a key to open your business?
• Know the password to your computer?
• Know your accounts receivable list?
• Have signing authority?
• Know what contracts are lined up or what inventory needs to be ordered?
19 March 2015 5
If you have a stroke tomorrow or die:
• Who will run your business? • Will your spouse be able to continue operating the business? • If your business is shut down or slowed significantly for a couple of weeks, how
does that affect its value?
19 March 2015 6
Planning for sickness or incapacity
• Enduring Power of Attorney • Deal with financial affairs • Important to choose business manager to be attorney: must be someone who
can manage the business or who will find someone to manage the business • No assumptions that spouse or child will have power • Gives access to information • Be specific • Name an alternate • Have a dispute resolution mechanism such as an arbitration clause
19 March 2015 7
Enduring Power of Attorney
• If there are agreements in place to sell the business or give it to a child this should be reflected in the Power of Attorney. Direct Attorney to review the will for any instructions.
19 March 2015 8
Personal directive
• Need a personal directive to manage health care
• Need a good health care advocate
• Powers include: • Donating organs for transplant • Removal from life support
19 March 2015 9
Death: Take the right road
• Don’t leave your family in a mess
• Questions to ask yourself: • Does your spouse need the income from your business to live on but he/she
can’t run the business? • Will your children take over?
19 March 2015 10
Will
• Make specific decisions about business
• Don’t leave all the decisions up to the executor and the beneficiaries
• Consider trusts for tax reasons or for dealing with problems, such as disabled children or addictions
• Set deadlines on when the business will be sold or transferred
• Distribute personal items (jewellery, china, etc.). Have a set of directions
• Leave a legacy
19 March 2015 11
All of this is to say:
• Planning is important • You save your family grief • Protect your business and family • You can save taxes
19 March 2015 12
Introduction
• Succession planning: transferring your business to the next generation
• Planning to minimize tax on the sale of your business
19 March 2015 14
Transferring your business to the next generation: Goals and objectives
• Financial plan
• Strategic plan
• Estate plan
19 March 2015 15
The traditional estate freeze
• Simple freeze • What if I don’t?
• Tax-effective way to transition a family business
• Shareholders exchange existing common shares for fixed value preferred shares and new shareholders (such as family members) subscribe for new common shares for nominal value
19 March 2015 16
Estate freeze (cont’d)
CANCO Value=
$1,000,000
Dad Mom
50 common shares
50 common shares
common share subscription price = $10,000/share
FREEZE
CANCO Value = nominal
50 preferred shares
CANCO value frozen: preferred share redemption price = $10,000/share [$1,000,000 aggregate redemption price]
Dad Mom
50 preferred shares
19 March 2015 17
Estate freeze (cont’d)
SUBSCRIBE
Dad Mom
CANCO
Son
50 preferred shares
50 preferred shares
100 common shares
preferred share redemption price = $10,000/ share [$1,000,000 aggregate redemption price] common share subscription price = nominal Future growth - accrues to the newly issued common shares
19 March 2015 18
Variations: Parents retain some participation
Dad Mom
CANCO
Son
50 preferred shares
50 preferred shares
50 common shares
preferred share redemption price = $10,000/share [$1,000,000 aggregate redemption price] common share subscription price = nominal Future Growth - accrues to the newly issued common shares (1/3, 1/3, 1/3) Family (Dad, Mom and Son) share new growth with income splitting opportunities if different classes of common share issued to each
50 common shares
50 common shares
19 March 2015 19
Variations: Parents retain voting control
Dad Mom
CANCO
Son
50 preferred shares
50 preferred shares
50 non-voting common shares
preferred share redemption price = $10,000/share [$1,000,000 aggregate redemption price] common share subscription price = nominal Future growth - accrues to the newly issued common shares Voting control - parents retain voting control
50 voting common shares
50 voting common shares
19 March 2015 20
Family trust
• A trust can be utilized in an estate freeze to subscribe for growth shares of a corporation
• Control and flexibility
• Tax efficient
• Asset protection
19 March 2015 22
Issues to consider
• What issues? • Control • Retirement • Successor • Estate plan • Life insurance • Third party risks • Conflict resolution mechanisms
19 March 2015 23
Sale of the business to a third party: Sale of assets, shares or both?
• Decision incorporates tax and non-tax considerations
• Planning must start well in advance of a sale so that various options remain available
19 March 2015 24
Sale of shares, assets, both?
• Sale of shares may allow an individual shareholder (or shareholders) to claim the lifetime capital gains deduction
• Sale of assets may permit shareholder to access “friendly” tax pools to minimize income taxes payable
• A “hybrid” transaction involves the sale of some shares and all of the “target” assets – best of both worlds?
19 March 2015 25
Planning to Use the Capital Gains Deduction
• Only available to an individual
• Lifetime maximum of approx. $400,000 per individual • ($800,000 capital gain = $400,000 taxable capital gain)
• Can only be claimed to reduce the taxable capital gain after the sale of “qualified small business corporation shares”
19 March 2015 26
Capital Gains Deduction (cont’d)
• Individual must be resident in Canada, have not exceeded maximum lifetime deduction to date, and deduction is limited by the use of certain losses
• Shares of corporation must meet three criteria to qualify
• Remove redundant assets prior to sale?
19 March 2015 27
Final Freeze Thoughts
• Growth shares can be issued to family members, a family trust or key employees via a “freeze” to multiply the number of capital gains deductions available
• “Freeze” planning assists intergenerational succession planning and a sale
• A “freeze” can accomplish most if not all of your business succession planning goals and objectives
19 March 2015 28
Breakfast for the mind An ounce of prevention: Succession planning for the business owner
19 March 2015 30
Welcome back Breakfast for the mind – Succession planning
19 March 2015
Heather Barnhouse, Partner
31
Succession/ Exit
• How is your business set up? • Corporation, partnership, sole proprietor, etc.
• How do you own your business? • 100% Yourself • Others
• How will you sell your business (what is your plan)? • Sell.. and walk away • Sell…but stick around (staggered sales, relatives, etc.)
19 March 2015 33
Unanimous Shareholder Agreement
• Owning less than 100% of the business
• Selling, but sticking around • Unanimous Shareholder Agreement - dealing with your rights and obligations
as a shareholder (or similar agreement in relation to partnerships, trusts, etc.)
19 March 2015 35
Unanimous Shareholder Agreement
• Shareholder Approvals (veto power) • Changes to the business • Sale of assets / properties of the business • Borrowing funds / lending funds • Hiring or firing of employees or officers • Others
19 March 2015 36
Unanimous Shareholder Agreement
• Appointing Directors • Do you wish to be (continue to be) a director – even after a partial sale?
• Appointing Officers • Do you wish to be (continue to be) an officer– even after a partial sale?
19 March 2015 37
Unanimous Shareholder Agreement
• Drag-Along Rights • Can you make others sell – when you
want to sell?
• Tag-Along Rights • Can you join the sale of others?
19 March 2015 38
Unanimous Shareholder Agreement
• Mandatory buyouts • Death
• Disability
• Competency
• Ceasing to be an employee or officer
• Divorce
19 March 2015 39
Team bios
19 March 2015
Heather Barnhouse Partner 1-780-423-7215 Heather.barnhouse@dentons.com
Keith Hennel Associate 1-780-423-7326 Keith.hennel@dentons.com
Doris Bonora Partner 1-780-423-7188 Doris.bonora@dentons.com
Sarat Maharaj Partner 1-780-423-7176 Sarat.maharaj@dentons.com
41
Carman McNary Managing Partner 1-780-423-2736 Carman.mcnary@dentons.com
Dentons Canada LLP 2900 Manulife Place 10180 - 101 Street Edmonton, Alberta T5J 3V5 Canada
Thank you
© 2015 Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. This document is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. We are providing information to you on the basis you agree to keep it confidential. If you give us confidential information but do not instruct or retain us, we may act for another client on any matter to which that confidential information may be relevant. Please see dentons.com for Legal Notices.
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